High Profile, Higher Stakes

Corporate lawyers blog about him, and Wall Street arbitrageurs track his decisions as if they were standings in a fantasy football league. He's the closest thing there is to a national celebrity business judge.

And now William B. Chandler 3d, chancellor of Delaware's prestigious Court of Chancery, is being asked to do something no other judge has had to ponder:

Force two chemical giants into a multibillion-dollar merger in the deepest recession since the 1930s.

The stakes: The possible demise of two huge, proud companies.

The case, brought by Philadelphia's Rohm & Haas Co., will be one of the most closely followed business litigations of early 2009 and infused with drama because of the nasty, and worsening, economic climate.

The government said Friday that the nation's gross domestic product plunged late last year at the sharpest rate since 1982 on weak auto sales and business investment.

Dow Chemical Co., the nation's largest chemical company, has warned that it could cut its dividend for the first time since 1912. Its earnings, expected Tuesday, could give a frightening view of business conditions in December.

David Bernick, a lawyer representing Dow, painted a devastating picture for Chandler of what could happen if Dow were forced to complete the $15.2 billion merger negotiated in July with Rohm & Haas.

The merger would create a corporate entity that is so "hobbled financially" that it would offer "no light at the end of the tunnel" for 60,000 employees, thousands of them in Philadelphia, Bernick told Chandler and Rohm & Haas attorneys in phone conversations last week. His comments were contained in court transcripts.

"This deal faces a very, very big problem," Bernick said. The combined company could "ultimately lead to the deterioration of two of America's finest and longest-standing chemical companies."

The Rohm & Haas purchase price is now larger than the stock market capitalization of Dow Chemical, Bernick noted, and Dow is trying to renegotiate a $13 billion loan with its banks. Dow signed the Rohm & Haas merger deal when oil prices were more than $120 a barrel.

Dow's plans for Rohm & Haas were thrown into chaos in December when the Kuwait government axed a proposed joint venture that would have provided Dow Chemical with $7 billion to $9 billion in cash.

Citigroup Inc. is the lead lender in a 19-bank consortium supplying a bridge loan. But the banking giant has its own problems and received $45 billion in U.S. bailout funds. Andrew Liveris, the chief executive officer of Dow Chemical, is a member of the board of Citigroup.

"We don't really know even if the banks would close," Bernick said, "although they're technically obliged to close." One of Dow's biggest problems is how to refinance the bridge loan in a year. Bernick, of the Chicago firm Kirkland & Ellis L.L.P., said Dow needed more time. But even time hurts. A "ticking fee" provision adds about $3 million a day to the purchase price.

Rohm & Haas sued Dow in Delaware on Monday to enforce the merger contract - in effect, close the deal. Provisions in the contract were met, the suit says.

"What will happen in the future to the bridge financing, it is, you know, frankly, not Rohm & Haas' problem," Marc Wolinsky, an attorney representing Rohm & Haas, said in the conversations with the judge and Dow attorneys. "We bargained for a closing. We bargained with the bridge financing in place."

Wolinsky urged Chandler to schedule a trial. Delays worked to Dow's advantage.

"I cannot overemphasize . . . that delay and uncertainty is hurting Rohm & Haas. It creates uncertainty with employees," said Wolinsky, of the New York firm Wachtell, Lipton, Rosen & Katz. "And the reality is, the best people, the people with the most options, are the people most likely to leave; and the uncertainty is hurting our employee base."

Chandler, who jogs daily near his courthouse in southern Delaware and lives in the same house he was raised in in Dagsboro, said his schedule was mostly free for the important Rohm-Dow case and set a trial for March 9.

Chandler has a wry sense of humor. In 2002, he held a Sunday court hearing on a Hewlett-Packard Co. case, joking to the gathered lawyers, "Welcome to the morning service." He said he'd have to explain to his mother why he wasn't in church. Other companies in his court have included Yahoo Inc. and the Walt Disney Co.

Companies resolve legal disputes in Delaware because of the state's business-friendly court system. The state's courts also have a reputation of protecting shareholder interests and upholding contracts.

Stock arbitrageurs follow Chandler and other judges on the Court of Chancery because they can profit by buying stock in a company whose merger is disputed. If a Delaware judge upholds the merger, the company's stock rises to the agreed-upon merger price.

Legal experts say they believe that Rohm & Haas has a strong contract. But Chandler told the attorneys that the Delaware court would consider circumstances other than just the contract.

John C. Rodney, a partner in the general corporate and mergers group Thorp, Reed & Armstrong L.L.P., of Pittsburgh, said the comment jumped from the transcript of the conversation.

"He's saying this is not a slam dunk, and I have to look at everything," Rodney said. "I'm thinking that he does not force Dow to go forward with this merger."

Rodney added that "it's rare that you actually win in a case like this with an order to close, because it's usually settled."

Dow agreed to pay Rohm & Haas shareholders $78 a share, a price that many say is double or triple what Rohm & Haas would trade without a merger. Some legal experts say they believe Dow is buying time to negotiate a lower price - something Rohm & Haas says it will not do.

Edward B. Rock, a corporate law professor at the University of Pennsylvania, said Dow's position was "really quite extraordinary" because the company doesn't seem to have a legal defense.

Dow could close the deal, Rock said. "It's just a deal that made more sense last summer than it does today. They think they overpaid."